The audacity of a tax rate change
In the recent movie Sully, Tom Hanks in the lead role says: “Everything is unprecedented until it happens for the first time.” And now a fundamental Corporation Tax challenge has happened for the first time. We have a new U.S. President to the right of us, Brexit to left, the EU and OECD all around us and we’re in the eye of an unprecedented and perfect tax policy storm.
President Trump wants to reduce the U.S. corporate tax rate by more than half to 15 per cent which isn’t a million miles away from our own cherished 12½ per cent rate. There are those who speculate it will end up around 18-20 per cent but that’s still a nosedive in tax rate terms and there’s also a U.S. border tax on imports to contend with. Meanwhile the UK Prime Minister in her Brexit speech said she envisaged a Britain that “would have the freedom to set the competitive tax rates and embrace the policies that would attract the world’s best companies and biggest investors to Britain”.
The two core aspects to her statement concerned the virtues of an attractive tax rate, and an attractive tax regime. In Ireland we know this blueprint works. Welcome to the new normal.
So in response, why not adopt the John Maynard Keynes approach “when the facts change I change my mind, what do you do sir” and consider reducing our own rate. At December 2016 Corporation Tax receipts were much higher than had been expected, up 7 per cent (€480 million) year-on-year even after a reported €150 million repayment due to one company. This would make changing our minds a little easier from a corporate tax rate perspective particularly when you consider that the corporate tax receipts for January (which isn’t a big corporate tax month) were €64 million; €40 million up on the same period last year. So we should endeavour to keep these levels sustainable.
There are those who would argue that changing a rate which we have held onto for so long sends a wrong message, but does that really hold? In light of developments in the UK and U.S. it sends a message that we value Foreign Direct Investment (FDI) here and want to ensure that international (and all) companies based here can continue to benefit here, even when the facts change. We all know the benefits brought about by multi-national companies here.
Further the UK’s Prime Minister noted in her speech that “…we will take back control of our laws and bring an end to the jurisdiction of the European Court of Justice in Britain….And those laws will be interpreted by judges not in Luxembourg but in courts across this country”. Many tax decisions I’ve read from that court say that national laws must comply with EU laws. However once outside the EU and following their enactment of the “Great Repeal Act” which is currently in the works, the UK may not be restricted by EU State Aid considerations which prevent Member States from benefitting certain business or sectors through State action. Similarly for the four EU freedoms allowing free movement of goods, people, capital and services.
The downside for them will be the well-rehearsed “passporting” difficulties that will restrict the ability of UK-based financial services businesses to operate in the EU. This may allow us benefit from relocations given our position as an English speaking gateway to the EU.
Ireland has always competed on tax through the “three R’s”: rate, reputation and regime. The UK’s Prime Minister mentioned two of those R’s – rate and regime - in her speech with the U.S. president adopting a similar approach.
On regime we’ve already sent a strong message to the EU in connection with its proposed Common Consolidated Corporate Tax Base (CCCTB). The CCCTB effectively takes profits from each member country and allocates them around Europe for tax purposes based on sales by destination, assets and employees by location. This would be detrimental to our economy and tax regime for both FDI and indigenous industry operating across borders. Denmark, Malta, the Netherlands, Sweden and the UK have given similar responses.
This proposed EU tax regime would rewrite tax law. Under CCCTB we would no longer have been able to attract FDI on the basis of having a different tax regime as all EU Member States would have the same regime. Take R&D as an example. Paul O'Neill, former U.S. secretary of treasury, once said "go find someone who says they'll do more R&D because they can get a credit for it, you'll find a fool". You can see his point, R&D will always happen, but the R&D tax regime is a factor in determining where that R&D happens. We have a “best in class” R&D tax regime according to the Department of Finance and it is more effective than what is suggested in the EU proposal. If you own a jet why trade it in for a 4 door saloon? Yes both are great transporters but which one would you rather keep?
In our response to the EU (known as a “reasoned opinion”) we said that the proposal offended the concept of “subsidiarity” within the EU treaty itself. Subsidiarity requires decisions to be taken at the level of individual States rather than at EU level, unless only EU action will achieve the required result. So subsidiarity is a "when all else fails, we don't" type approach by the EU. CCCTB goes beyond what is necessary and disagrees with OECD approaches which the government has supported. The EU proposal was first reviewed in 2011 and we’ve gone back this time with the same answer as we did the last time so maybe it’s time for the EU Commission to heed Disney’s counsel and “let it go”.
There is one set of facts at one point in time but the facts change over time and minds can change. To change our corporation tax rate to bring long term benefits to taxpayers and the Exchequer is to all our benefit. Given our seat in the eye of the perfect storm, it’s time to look at this again.
Tom Maguire is a Tax Partner in Deloitte and this is the first of his monthly columns on tax matters which appeared in the Sunday Independent on 12th February 2017.